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DC Model for Health Benefits

New private health exchanges offer large companies cost control.

While state insurance exchanges are mandated by healthcare reform to be up and running by 2014, some private health insurance exchanges that target corporations are already doing business, suggesting that healthcare benefits may follow retirement benefits’ shift to a defined-contribution model.

Benefits consultancy Mercer launched a suite of health exchange products last week, joining competitor Aon Hewitt, which announced a health exchange for employers last year. Bloom Health, a Minneapolis-based company that operates an exchange, was acquired last year by three health insurers: WellPoint, Blue Cross Blue Shield of Michigan and Health Care Service Corp., which operates Blue Cross and Blue Shield plans in four states.

Participating companies provide their employees with a lump sum and direct them to the exchange, where they can choose from an array of plans. With this arrangement, a company knows exactly how much it will pay each year and lessens its administrative burden, while employees get more transparency on what the company pays for their health coverage. And as employees shop at the exchanges, the competition for their business is expected to help contain health insurance costs.

“If one plan costs 10% more than another, the employees are likely to pick the lower-cost plan,” says Steve Raetzman, a partner in Mercer’s U.S. health and benefits business, pictured at right. He predicts the exchange will encourage insurers to look for ways to get their costs down. “It really is bringing the power of the consumer market into healthcare and making it more competitive and more cost-effective.”

A recent Aon Hewitt survey showed 44% of companies say a private exchange will be the way they provide health benefits to employees in the next three to five years.

“The employer marketplace is shifting, with about half of companies wanting to stay in the delivery business, and the other half of employers wanting to move to more of a defined-contribution approach and take a step back from delivery of benefits and plan design,” says Ken Sperling, Aon Hewitt’s national health exchange strategy leader.

Aon’s exchange, which it rolled out to its own employees at the start of 2012, offers four levels of coverage from two insurance companies. Sperling says 19 companies are interested in using Aon’s exchange for 2013. Those companies have 350,000 employees and insure 600,000 people in total, for $3.5 billion of premium, he says.

The 19 companies represent a range of industries, Sperling says, and all previously self-insured at least some of their employees.

Mercer is launching three products, including the Mercer Benefits Choice Exchange, which has been in pilot in the Midwest and will now be expanded to other locations. Companies pay a set amount to a health reimbursement account that employees can use to choose health insurance from multiple insurers. Mercer also has an offering for retirees that allows them to take an employer subsidy and use it to purchase coverage.

The third product from Mercer, Health Advantage targets companies with 3,000 or more employees that are self-insured and provides offerings from two insurers, Raetzman says, along with a care management program whose nurses will focus on helping those with multiple chronic conditions navigate the healthcare system. “The Health Advantage model derives its savings primarily from much better care management,” he says.

Healthcare reform requires every state to set up an insurance exchange by 2014 for small employers and individuals. Beginning in 2017, states are allowed to open their exchanges to larger employers.

But, according to Aon’s survey, 57% of companies don’t see the state exchanges as a viable option.

The differences between the state exchanges will pose administrative and logistical challenges for employers that operate in multiple states because the state exchanges won’t provide uniform coverage, Sperling argues. The federal government gave each state the power to determine which health benefits are essential and must be provided by insurers, he says. And some states may decide not to open their doors to large employers in 2017.

Meanwhile, the steady rise in healthcare costs is expected to keep pressure on employers. Healthcare costs are “going to continue to rise faster than pay, faster than inflation and they’re going to be rising faster than employers, employees and governments are willing to spend money,” says Mercer’s Raetzman. “That cost pressure is not going away and that is going to create the need for everybody in the healthcare system to keep finding better way to manage healthcare costs.”

Sperling agrees that “the status quo is just not sustainable,” and adds, “even the 6% compound annual trend that companies have experienced over the last five years is not sustainable. There’s got to be a new normal.”

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